Level 2 Option Report 

Level 2 finds attractive trades and then it adds an edge. This service uses option spreads to hedge risk and increase the probability of success. The strategies produce more consistent results relative to Level 1 but they require more time and capital. 

Issue     07/27/2010 Recent Reports     Past Reports    

Bullish CMI
Stock Option Trading Strategy Sell out of the money put spread.
Stock Option Trade Sell 10 CMI Aug $75 puts (CMI 10T75.00) and buy 10 CMI Aug $70 puts (CMI 10T70.00) for a net credit of $.95 - Day. Filled 7/27/10
Stock Option Target Buy back the spread for a net debit of $1.10 - Day. filled 8/12/10
Stock Option Stop Contingent on the stock below $73.70, buy back the spread - GTC
Stock Description Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide.
option trading

Option Trade Rationale Net income at Cummins Inc. almost quintupled in the second quarter on sharply higher sales of engines and components, the engine manufacturer said today.

The company earned $246 million, or $1.25 per share, up from $56 million, or 28 cents per share, in the same period last year. Revenue rose 32 percent to $3.21 billion.

Analysts surveyed by Thomson Reuters expected the company to earn 91 cents per share on $2.84 billion in revenue.

Cummins said sales of engines -- its biggest segment -- rose 45 percent to $1.9 billion, while components sales rose by the same percentage to $729 million. The company said it benefited from sales outside the U.S., which rose by more than half and now account for 64 percent of revenue.

The stock trades at a forward P/E of 15.
Trading Game Plan "We continue to benefit from our leadership position in large and growing international markets such as China, India and Brazil," CEO Tim Solso said in a statement.

This stock has been strong relative to the market and it did not pull back during the May/June market decline. I like the breakout to new highs and that 2/3 of the revenues come from outside of the US.

With strong earnings behind it and its success in high growth markets, the stock should be able to move higher. At very least, it will hold its own even if the market declines. Current Assets exceed Total Libilities and it has a rock solid balance sheet.

We need to add a bullish position to hedge some of our bearish positions.
Stock Option Track Record 7/27/10 - Sold 10 CMI Aug $75 puts (CMI 10T75.00) and bought 10 CMI Aug $70 puts (CMI 10T70.00) for a net credit of $.95.

8/12/10 - We bought the spread back for $1.00. The puts were offered at $1.30 and bid at $.30. Time decay allowed us to buy this back for a small loss even though the stock moved lower. The dramatic market decline yesterday spooked me and I wanted to reel this position back in. Any more weakness in China will hurt cyclical stocks. We lost $90 (10 x $.05 plus commissions 4 x $10). Better safe than sorry.